A Brief Guide to Merit Aid and Student Loans

June 1, 2015

Managing College Costs Without Need-Based Financial Aid

This spring, I took a course on financial aid as part of UCI Extension’s Independent Educational Consultant Certificate Program. For my final project, I created this document, intended for families who do not qualify for need-based financial aid, but who seek assistance in managing the cost of college.

The two primary options for reducing your expenditure on college are loans and scholarships—in particular, merit aid. In this document, we assume the student is a first-year freshman receiving no other financial aid to cover the cost of tuition, room and board, and all other college expenses. Rules are different for transfer and graduate students.

Merit Aid Resources

Merit aid can significantly reduce the cost of college, and you don’t need to be a straight-A student to find it. Seventeen percent of students received merit scholarships from the private colleges on Money magazine’s list of 665 “best colleges,” and the average award was $12,500. In some cases, merit aid can make a private college more affordable than a state college.

Making the most of merit aid requires an open mind. If you are earnest in your desire to make college more affordable, you will probably have to trade prestige for price. Your student will have the best chance at receiving merit aid at colleges where he or she is in the top 25% of the applicant pool. Highly ranked schools like Stanford and the Ivies don’t give out any merit aid because they don’t have to. But for example, at Tulane University, an outstanding private college in New Orleans, 36% of students receive merit aid, with the average award over $20,000. As another example, a student with a 3.2 GPA might get into University of Colorado at Boulder, but likely won’t receive any merit aid, whereas the same student might receive over $8,000 off tuition at Colorado State University in Fort Collins.

National Merit Scholarships

You were probably told the PSAT doesn’t matter, and it doesn’t—unless you are a National Merit Semifinalist or Finalist, in which case significant merit aid could be at stake. Only the PSAT taken during junior year counts towards National Merit Scholarships, and the cutoff varies each year and by state. (In California, it’s typically around 222. This could change with the revamped PSAT in 2015.) National Merit Scholarships come from three sources: the National Merit Scholarship Corporation itself; corporate awards to children of employee, community members, or by other criteria; and certain colleges. Some colleges automatically award scholarships of $500-$2,000 to students who are National Merit Semifinalists or Finalists.

My opinion is that school counselors who downplay the PSAT do a disservice to students who have the potential to score well and earn money. If your student scores well on the PSAT taken during sophomore year—say, over 200-210 on the current version—it absolutely makes sense to prep for the junior year exam and aim for National Merit.








Student Loan Options

Student loans have gotten a bad rap, largely because many families over use them and students end up graduating deep in debt. Student loan debt today exceeds $1 trillion! But responsible borrowing is not necessarily a bad thing. Student loans can ease the burden of paying for college and teach students important lessons about managing debt in the process. Loans fall into two main categories: Federal and Private.

Federal Student Loans

All families should complete the Free Application for Federal Student Aid (FAFSA), even if you don’t think you will qualify for need-based aid. You cannot get a federal student loan without it. Why does this matter? Because federal loans typically have lower, fixed interest rates and more flexible repayment terms than private loans. Assuming your family does not show financial need, the types of federal loans available include:

  • Direct Unsubsidized Loans of $5,500–$12,500 per year. These are loans in the student’s name, also known as Stafford Loans, available regardless of family income.
    • Current interest rate is 4.66%; interest rate is fixed based on year you took out the loan
    • Loan fee is currently 1.073%
    • Loan repayment begins six months after graduation
    • Various repayment plans. See options at https://studentaid.ed.gov/repay-loans/understand/plans
    • Student must complete an Entrance Counseling Session
  • Direct PLUS Loans to parents of dependent undergraduate students for any costs not covered by financial aid.
    • One of the easiest loans to get; not based on need, only on credit history
    • Can borrow up to full cost of attendance
    • Current interest rate is 7.21%
    • Loan fee is currently 4.292%
    • Must reapply each year
    • Repayment begins immediately after it has been fully disbursed; however, deferment may be requested.

It’s worth noting that interest accrues on these loans from the time the funds are disbursed. It’s therefore advisable for families to pay the interest on the loan while the student is still in college to keep the loan at its principle level.

The federal government also offers need-based loans, which include subsidized Stafford Loans (interest does not accrue while student is in school) and Perkins Loans (in which the college, rather than the government, is the lender). For a complete list of Federal Student Loans, visit: http://studentloans.gov .

Private Student Loans

Private student loans are offered by banks and other financial institutions. Interest rates may be variable and are typically based on either the Prime or LIBOR index. Always check interest rates and fee structures before taking out private loans.

How much can you borrow?

Assuming you do not qualify for subsidized loans, but you do qualify for a PLUS loan, the maximum Stafford loan per year is as follows:

Freshman                  $5,500

Sophomore               $6,500

Junior /Senior           $7,500

If you are not able to get a PLUS loan, those maximum amounts increase to:

Freshman                  $9,500

Sophomore               $10,500

Junior /Senior           $12,500

PLUS loans and many private loans allow you to borrow the full cost of attendance, which is why all families should ask the following question.

How much should you borrow?

Loans can be a pitfall of higher education financing. With PLUS loans offering enough to cover the full cost of attendance, it’s easy to fall into the trap of borrowing too much money! These online calculators can help you ensure the payments on the amount you are borrowing will be manageable:



Consider the estimated annual income and expenses for your student after graduation. The Bureau of Labor Statistics offers a useful resource for estimating future salaries at: http://www.bls.gov/ooh/ .

Loan Repayment Options

Upon graduation, students will undergo exit counseling to discuss loan repayment options. There is typically a six-month grace period before payments begin, unless the student attends graduate school. Repayment options include:

  • Standard: Fixed payment for 10 years
  • Graduated: Lower payments at first that increase gradually over 10 years
  • Extended: For students with more than $30,000 in debt, a standard or graduated repayment plan for up to 25 years

Additional income-based repayment options are available. These include:

  • Income-Based Repayments (IBR), in which the maximum monthly payment is 15% of discretionary income. There must be partial hardship. Repayment is up to 25 years.
  • Income Contingent Payments, which are calculated each year based on the income for up to 25 years.
  • Income Sensitive Repayments, for up to 10 years. Monthly payments are based on income but may vary depending on servicer assigned randomly by the Department of Education.
  • Pay as You Earn, with a maximum payment of 10% of the discretionary income. Balance may be forgiven after 20 years but is subject to income tax.

Loan consolidation may be used to simplify repayment and possibly lower monthly payments, but the overall cost of loan will likely turn out to be higher. When unexpected circumstances arise, deferment or forbearance can enable students to temporarily postpone federal student loan payment. A deferment is usually based on being in graduate school, unemployment, or military service. A forbearance is granted when you don’t qualify for a deferment but are unable to make loan payments due to financial hardship, illness or other circumstances. Smart and responsible borrowing can help prevent these circumstances!

I am astonished at how much I learned from this class, which I started with trepidation. Nevertheless, I don’t consider myself a professional advisor on managing the cost of college. I highly recommend visiting Lynn O’Shaughnessy’s website, www.thecollegesolution.com , reading her book or attending one of her webinars.

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